Govt rules out return of capital gains tax

Finance Minister P Chidambaram has ruled out reintroducing long-term capital gains tax on equity transactions or unilaterally reviewing the double tax avoidance treaty with Mauritius.

"There is no intention to reintroduce long-term capital gains tax on securities traded on the stock market... The issue of Double Taxation Avoidance Agreement has been debated threadbare. Due to host of economic, political and diplomatic reasons, the treaty cannot be reviewed unilaterally," Chidambaram said on Saturday.

Chidambaram's response today came against the backdrop of the demand of CPI(M) that the government should reintroduce long-term capital gains and dividend tax, apart from reviewing the DTAA with Mauritius, which was being increasingly used by FIIs for avoiding tax.

The bear run in the market that led to a fall of nearly 1,300 points in the key index in two days was partially due to heavy selling by FIIs on fears that the Central Board of Direct Taxes may impose higher tax on them.

The FII withdrawal had prompted the Finance Minister to clarify that no FIIs would be taxed and the fears were based on "uninformed reporting." Allaying apprehensions about the economy, Chidambaram said economic fundamentals were very strong and had not changed recently.

"The foreign exchange reserves were at $ 163 billion, inflation reined in below 4% for several weeks, manufacturing sector is growing at over 9% and monsoon has set in, which is expcted to be good," Chidambaram said.